With government spending, virtue hath its own rewards

In 1900, the governments of the world’s most advanced economies taxed and spent, on average, 10 per cent of respective GDP each year. By 2000, they taxed and spent 33 per cent – France alone taxed and spent more than 50 per cent.

In its most recent analysis of government spending, the Paris-based Organization for Economic Co-operation and Development says its 34 member countries now spend, on average, 44.6 per cent of GDP – and that 10 of them spend more than 50 per cent.

In a similar analysis of a larger block of countries, the Lausanne-based IMD Business School’s World Competitiveness Report says the number of European governments that spend more than 50 per cent of GDP has risen to 12. It puts average government spending in the world’s 58 most developed countries at 47 per cent of GDP and says the 23 biggest state spenders are all European countries. From this perspective, the very concept of limited government – from which many of our blessings flow – looks quaintly anachronistic.

Europe’s increase in public-sector spending, of course, can’t be sustained. Most top-spender countries will be compelled to cut back. OECD Secretary-General Angel Gurria says bluntly: “They have no choice.” If they continue to dispense two-thirds of their respective economies, chances are they’ll live with near-zero economic growth.

If they live with near-zero growth, they’ll need to commandeer more GDP. In this spiral, they’ll never have enough GDP, never enough growth.

Ireland is now the most spectacular state spender. The government’s share of GDP has essentially doubled since 2007, rising from 36.8 per cent to 66.1 per cent. Once a “tiger” economy, Ireland now ranks 24th in economic growth among the 58 WCR economies. In these economies, only one top 10 state spender (Sweden) ranks in the top 10 growth nations. Britain is 20th, France 29th and Italy 42nd.

Whether democratic or authoritarian, states rarely retreat. The question now is whether the European democracies will abandon free-market economics altogether and go for broke with some more interventionist form of capitalism. Stephane Garelli, director of the IMD’s World Competitiveness Center, gets right to the crux of the matter. “In a new world of state capitalism, government efficiency will be a key determinant to competitiveness.”

Alas, amongst the democracies, governments are far less efficient in allocating resources than businesses. Dictatorships, on the other hand, can be quite decisive and efficient – for a while. Could a European democracy govern as though it were an Asian autocracy? Could Ireland?

U.S. political scientist Ian Bremmer reached the same conclusion. “I think it highly unlikely that state capitalism will ever replace the free-market variety in the developed world,” he wrote in Foreign Affairs magazine. “Faith in the ability of markets to value assets and allocate resources is philosophically entrenched in Australia, Canada, Europe, Japan and the United States. I believe that it would take a genuine political and economic catastrophe – a global pandemic that kills millions of people, a terrorist attack carried out with weapons of mass destruction on a major Western city [or] a war in the Middle East that pushes oil prices to staggering new heights.”

The stupendous spending of democratic governments, he says, doesn’t signal the demise of the market economy. Rather, it indicates the cost of saving it – the cost, in other words, of rehab. In fact, though, treatment of this kind can kill you. It’s akin to blood-letting, the morbid practice of draining away people’s lives to assist their healing.

In these reflections, Canada again looks good. Canadian governments spend less than 40 per cent of GDP. By WCR assessment, Canada is the seventh most competitive nation on Earth. (The U.S., debt crisis notwithstanding, ties with Hong Kong at No. 1.) Virtue hath its own rewards, and Canada has kept the faith.